Retailers Credit Association of Alameda County v. Commissioner of Internal Revenue
| Decision Date | 25 February 1936 |
| Docket Number | Docket No. 78008. |
| Citation | 33 BTA 1166 |
| Parties | RETAILERS CREDIT ASSOCIATION OF ALAMEDA COUNTY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John L. Reith, Esq., and D. A. Sargent, C. P. A., for the petitioner.
C. P. Reilly, Esq., for the respondent.
The respondent determined an income tax deficiency for the calendar year 1931 against the petitioner in the sum of $465.43. The taxpayer contests the deficiency on the ground it is exempt from such tax under the Revenue Act of 1928, section 103 (7).
FINDINGS OF FACT.
The petitioner was organized in May 1917 as the Cooperative Credit Association of Alameda County, under title XX, division 1, part 4 of the Civil Code of the State of California, which provided for the organization of cooperative associations which might operate thereunder on a profit or nonprofit basis. The name of the petitioner was changed in 1925 to, and still is, Retailers Credit Association of Alameda County. Its officers consisted of a president, vice president, secretary, and treasurer, who were elected by its 11 directors. The directors were elected by its members, each of whom had an equal vote. The actual operation of petitioner was carried out by a manager appointed by the directors.
Petitioner has its place of business in Oakland, California. It has no stockholders but is composed of members, each of whom pays a membership fee of $5 to join. This membership is evidenced by a certificate of membership. The membership is composed of persons, firms, and corporations engaged in retail business in Oakland and other East Bay cities, and dentists, doctors, and other professional men, whose practice makes it desirable to inquire into the credit standing of their patients and clients.
The articles of incorporation of petitioner set out the purposes for which it was incorporated, in article II thereof, as follows:
(a) To carry on the business of furnishing to members of the association at rates and upon terms to be fixed in the by-laws of said association, information, reports and statements concerning the financial standing and credit rating of individuals, firms and corporations.
(b) To act as the agent of the members of said association upon terms to be fixed by the by-laws in the collection of moneys, accounts, property, and other things of value due the members of the association.
(c) To act as the assignee of claims for money, accounts, property and other things of value due to the members of the association, upon terms to be fixed by the by-laws of said association, and in its own name as such assignee, to sue for, compromise, collect and pay claims, accounts, moneys or other things of value due to the members of the association.
(d) To engage in, conduct and carry on the business of a general mercantile credit agency and to do any and all things necessary to the conduct of such business.
(e) To encourage the prompt payment of bills and accounts due to the members of the association and generally to do any and all things looking to the establishment of a higher degree of efficiency in the conduct of credit business between retail mercantile establishments, retail and wholesale dealers, banks, real estate operators, merchants and all other persons, firms or corporations doing business with the general public.
(f) To gather all information available with reference to the credit standing of persons, firms and corporations and to report thereon upon such terms as may be provided for by the by-laws to the members of the association.
(g) To assist in securing legislation, local, county, state and federal which will encourage better credit conditions and to aid in the enforcement of such legislation.
(h) To purchase, or otherwise acquire, own, hold, lease, mortgage and sell real and personal property, particularly such real and personal property as may be desirable or convenient to carry out the purposes of this association and to secure and maintain the necessary offices and plants, and to properly equip the same.
(i) To purchase or otherwise acquire, own, hold, sell, transfer and pledge shares of the capital stock or other securities of any corporation or association which may be necessary, convenient or desirable for furthering the best interests of the association and to exercise in relation thereto all the rights of ownership.
Petitioner was a member of a national organization of approximately 1,200 credit associations.
Petitioner furnishes credit reports on natural persons, exclusively, and to its members, only. A charge for each such report is made, exclusive of the membership fee, which charge may be and has been changed from time to time by petitioner. Petitioner also collects accounts due its members. This service is also limited to its members, for which services the member pays petitioner a commission. During the tax year involved, this particular service was operated at a loss.
Petitioner renders other services from which it derives no income. These services include advertising campaigns for the encouragement of the public to pay their bills promptly; arranging and executing group settlements in which embarrassed debtors are physically assisted by petitioner in allocating available funds to the reduction of indebtedness; furnishing "reciprocal reports" for members; minimizing competition among retailers; issuing information to members on marriages, divorces, deaths, bankruptcies, and other matters affecting credit; conducting classes for the education of members' employees on credit practices; and actively supporting or opposing local, state, or national legislation affecting credit matters. The group settlements mentioned were effected only where a member of the association was involved.
There were no corporations similar to petitioner furnishing all the services petitioner provided, in the locality it served during 1931. But, there were privately owned corporations, for profit, furnishing credit reports and collection services for which charges were made, in the same locality, during the same time.
Petitioner had accumulated profits of $32,587.53 from its operations during the years prior to 1931. It made a net profit of $6,878.61 during the year 1931. No part of petitioner's profits has ever been distributed as dividends. The association has used its profits to enlarge and expand its business in order that it might render better service to its members. The entire surplus of the association was invested in equipment peculiar to the service it was performing in 1931 in the locality served, except as to a limited amount which was no more than sufficient to carry its current expenses. It was the intention of petitioner to maintain the price of its services, for which it charged, at a point which would enable it to make only sufficient profit to care for the expanding needs of the business. With respect to profits and dividends, section 1, article XII of the bylaws of petitioner provides:
SECTION 1. Any profits made by the Association shall be devoted, first, to the payment of any and all outstanding debts of the Association; second, to improvements or betterments in the plant, equipment and service of the Association; and third, to the payment of dividends, in equal amounts to each and all of the members of the Association; but nothing herein contained shall be so construed as to limit the power of the Directors to pass or suspend the payment of any dividend or to withhold the division of any profits when, in their opinion, it is to the best interests of the Association so to do.
The petitioner's claim for exemption from capital stock tax for the taxable year ended June 30, 1933, was sustained by the Commissioner of Internal Revenue on the ground that it was entitled to that exemption within the provisions of section 215 (c) (1) of the National Industrial Recovery Act and section 701 (c) (1) of the Revenue Act of 1934, as a corporation within the meaning of section 103 of the Revenue Act of 1932 or section 101 of the Revenue Act of 1934.
The activities of the petitioner were substantially the same during and before 1931 as they were thereafter.
Petitioner, during the calendar year 1931, within the meaning of the Revenue Act of 1928, section 103 (7), Regulations 74, article 528, construing the same, was neither a business league, chamber of commerce, real estate board, or board of trade; was organized for profit; and part of its net earnings, during that year, inured to the benefit of its members.
The petitioner reported a net income of $6,878.61 for the calendar year 1931. It paid no tax on that income upon the ground that it was an exempt corporation under the Revenue Act of 1928, section 103 (7).1 The respondent denied petitioner the exempt status, as claimed, and accordingly determined the pending deficiency. The only issue presented is whether the respondent was correct in his denial of petitioner's asserted exemption from income tax under the cited statutory provision.
The rule that a taxing act shall be construed strictly against the Government in the inclusion of income within its purview is reversed where the taxpayer seeks the benefit of an exemption from such tax. To secure such exemption, the taxpayer must not only carry whatever burden of proof the determination of the pending deficiency imposes (Helvering v. Taylor, 293 U. S....
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